- The US Fed appears to be more cautious about the economy but remains in tightening mode, with a further two rate hikes expected in 2019
- There are signs of slowing momentum in the US economy but fundamentals remain relatively robust, especially in the labour market
- The property market has dominated the headlines in Australia, with significant falls in the Sydney and Melbourne markets during 2018
- Economic growth in Europe is slowing while political risks in the form of Brexit and the Italian budget are fuelling uncertainty
- Chinese manufacturing contracted in December while markets eagerly awaited the resumption of trade talks in the new year.
The RBA’s December minutes revealed that members were wrongfooted by the September quarter GDP release, which came in lower than expected at 2.8% year-on-year compared to an expected figure of over 3.0%. Members noted that the outlook for household consumption is uncertain due to low income growth and relatively high levels of household debt, together with declining property prices. However, the bank still expects steady growth in consumption supported by robust labour market conditions and a gradual pickup in wage growth.
The new year has started on a downbeat note as markets continue to worry about softer economic growth globally and a possible peak in US corporate earnings. Hope remains that a trade deal can be struck between the US and China, but in the meantime trade tensions have had a significant impact on factory activity in Asia, while temporary boosts to US GDP appear to be fading.
The US Fed lifted the target funds rate to a range of 2.25–2.50% as markets had long anticipated, but the move was not entirely without doubt given recent market volatility and concerns over slower economic growth. The Fed lowered its forecast for 2018 GDP growth from 3.1% to 3.0% and reduced its 2019 forecast from 2.5% to 2.3%.
Eurozone GDP growth continues to disappoint, rising 0.2% in the September quarter according to December’s estimate. In Germany, the growth picture continues to be clouded by developments in the auto industry, with major car manufacturers having problems certifying vehicles in accordance with the new exhaust and consumption standards. The IHS Markit Europe Sector PMI showed further falls in output for autos, driven by a drop in new orders, while purchasing of inputs contracted at the sharpest rate since March 2013.
China’s official manufacturing PMI fell from a flat 50.0 to 49.4 in December, marking the first month of contraction since July 2016, driven by the domestic economic slowdown and the ongoing trade dispute between Beijing and Washington DC. New export orders contracted for the seventh month in row.
The Japanese government revised down its forecasts for GDP growth and inflation following an economic contraction in the September quarter. Growth is forecast at 0.9% for the 2018 fiscal year (which ends in March 2019), down from the previous projection of 1.5%, while fiscal 2019 growth is estimated to be 1.3%, down from 1.5%. Japan’s manufacturing PMI rebounded in December from 52.2 to 52.6, ending 2018 with a strong upturn in production, although growth in new orders was muted and export sales declined.